Half of American Households Paying No Income Tax for FY09

According to Tax Policy Center, a Washington based research organization, around 47% of the American households have no federal income tax obligations for the financial year 2009. They have either very low incomes, or deductions, exemptions and credits, which have made their tax liability zero.

The main reason for this trend is the increased number of tax credits and cuts. The low-income and middle-income families, who have children below 17 years, get sufficient tax credits to have no income tax even if their income is around $50,000. The tax cuts for the low- and middle-income households have grown as a result of the economic recovery programs.

Taxes are used for various important activities like infrastructure building, public education and national defense. Many people have argued that the current tax policy is discriminatory as half of the population enjoys the benefits of public programs without contributing to them.

There is resentment against these policies from some sections of the society, as the rich bear a greater burden of the taxes. In fact, statistics show that top 10% earning households pay almost two-thirds of the total federal income tax.

I do not agree with these arguments. The tax obligation for the rich is more because their income is also much more and has increased much faster than those of other people. Today, the top earners have a much greater share of the total income than they did earlier, pointing to how the rich are getting richer and poor either staying the same or getting poorer.

With a greater share of income, it is only reasonable that the rich also have to bear a greater share of the income tax. In fact, per dollar tax has only decreased for them. If more taxes are not collected from the rich, then either the social security and other beneficial programs will have to be cut down or the taxes across the board have to be increased. In either case, the income gap will only increase.

Besides, people are paying other taxes also such as the federal payroll taxes that fund social security and other benefits. An average middle class household pays 0.8% of its income in corporate taxes, 9.5% in payroll taxes and 0.9% as excise duties. Many low income American households are actually paying more in taxes than they are getting back as benefits.

So in reality, the low income people are not getting the services for free, but are paying for them through taxes other than income tax. Even the chances of the income being hidden by these families to decrease tax obligations are much lesser than by the rich.